Yesterday’s conference call with analysts dissected the FY 2016 3Q earnings results for Microchip Technology, Inc. (MCHP). It offered a few insights on the purchase of Atmel (ATML) for $3.5 B.
MCHP stands behind its confidence that “synergies” from the deal will reap $170 million of profits. Yesterday, I questioned the merits of a deal that only yields a 4.86% return on capital, depletes the cash on MCHP’s balance sheet and raises leverage.
A comment by the CEO Steve Sanghi stood out to me:
“Well, we’re not learning much about the business at this point in time. Atmel is essentially not shedding anything about the business. We still see that Antitrust hasn’t cleared and we still see the businesses as competitive. We’re largely getting through the people, we tour the facility, we’re learning where people are located, we’re starting to formulate some initial thoughts about how we will go about the integration. We have done enough of these that we know what burdens we have to push and what we have to do so we can get there quite quickly. But in the two weeks that have passed, they are not letting us into the business yet.”
I don’t find it surprising that Atmel is holding their cards close to the vest, but I do find the confidence in perceived “synergies” to be wildly optimistic for a CEO that has barely scratched the surface of the ATML integration.
ATML has seen revenue decline from over $1.4 B in 2014 to $1.2 B in 2015. It will likely see its free cash flow from operations nearly cut in half – from $150 million in 2014 to between $75 and $85 billion in 2015.
MCHP has been through the acquisition game many times, but ATML is different. It enlarges the business by 47% and takes on a company facing serious headwinds in Asia. It also increases debt from about $2 B to $2.7 B at a time when leverage appears to be a growing problem for companies exposed to Asia.